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Hess, a global energy producer, is undergoing a makeover that could leave it a slimmer but stronger oil-patch gem.

The New York-based company, under pressure from activist investor Elliott Management, has been working to shed assets, including its oil-storage terminals, energy-trading and market operations, and several international properties, in order to focus on exploration and production. The company also plans to unload 1,350 Hess gas stations, a familiar brand across much of the U.S.

Hesshes -1.0064177362893816%Hess Corp.U.S.: NYSEUSD67.87
-0.69-1.0064177362893816%
/Date(1427835842783-0500)/
Volume (Delayed 15m)
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3393765AFTER HOURSUSD67.6197
-0.25030000000001-0.36879328127302197%
Volume (Delayed 15m)
:
100884
P/E Ratio
9.00132625994695Market Cap
19596846316.3208
Dividend Yield
1.4734050390452336% Rev. per Employee
3526110More quote details and news »hesinYour ValueYour ChangeShort position
shares (ticker: HES) have rallied 64% in the past year, to close Friday at $73.94, spurred in large part by the company's receipt in January of a letter from Elliott founder Paul Singer, disclosing the New York hedge fund's 4% stake in the company and decrying Hess' "lack of focus and strategy." This year's 2.7% run-up in oil prices, to north of $108 a barrel, also has drawn investors to Hess and other energy plays.

Hess could have more room to run, say analysts and investors, with some projecting a 12-month target price in the low- to mid-$80s.

Elliott charged that Hess' capital-allocation decisions were obscuring the company's true value, which it pegged at as much as $126 a share. Elliott advocated that Hess spin off its valuable acreage in North Dakota's Bakken oil shale, shed downstream assets, and streamline its international portfolio. "Simply put, what is an E&P [exploration and production] business in 2013 doing in the hedge-fund business?" Singer's letter stated.

The fund also pushed for five new board members, and a separation of the chairman and chief executive roles, held by John Hess, son of company founder Leon Hess. It noted that Hess shares had underperformed competitors during John Hess' 17-year stewardship.

Elliott already has scored some big victories. Three of its candidates were elected to Hess' 14-member board at the company's May 16 shareholder meeting, and John Hess agreed to step down as chairman, while keeping his CEO post.

Founded 80 years ago as a one-truck residential-delivery service, Hess has become one of the world's most diverse energy concerns. It reports results in two segments: Marketing and refining generated 67% of last year's revenue of $38 billion, while exploration contributed 32%, although it was responsible for 91% of earnings. Crude oil and natural-gas liquids account for more than 70% of proved reserves of 1.55 billion barrels of oil equivalent, making Hess more leveraged to oil prices than most other major E&P outfit.

After accounting for divestitures, Hess is expected to earn $2.2 billion, or $6.31 a share, this year, on revenue of $19.8 billion. Per-share earnings will get a lift from stock buybacks, as a $4 billion share-repurchase program is scheduled to commence before year end. Analysts expect the company to earn $5.99 a share in 2014, with the expected drop reflecting additional asset sales. The early earnings consensus for 2015 is $5.67 a share.

By almost any metric, Hess sells at a discount to many peers, and to its historic valuation. Based on enterprise value to 2013 estimated Ebitda, or earnings before interest, taxes, depreciation, and amortization—the preferred metric for exploration and production companies with heavy capital expenditures—the company sports a multiple of 4.3, below the industry's 5.1 EV/Ebitda average, as calculated by Oppenheimer.

The Bottom Line

Hess shares have rallied 64% in the past year, to $73.94. They could climb to the mid-$80s as management focuses on exploration and production.

John Williams, an analyst at T. Rowe Price Associates, Hess' top institutional holder with 4.65% of the shares, thinks the company could earn a higher multiple, pushing the stock up to the low $80s, if management continues to execute asset sales. More aggressive sales could lift the shares closer to $100. "I feel comfortable with the oversight of the company," he says. "There's a magnifying glass on [management] to make sure they perform well."

HESS' PRIZED ASSET is 725,000 acres in the Bakken shale, one of the richest energy plays in the U.S. Elliott values the Bakken acreage, together with smaller shale plays in the Utica and Eagle Ford formations, at $37.48 to $40.99 a share. Elliott officials weren't available for comment. Hess, which reports third-quarter earnings next week, declined to comment.

CEO John Hess, 59, has said that Hess began moving to a pure E&P company in 2010. In January the company said it would leave its oil-storage terminals, and in March it announced plans to leave its energy-trading and marketing operations, and holdings in Indonesia and Thailand. Hess realized almost $3.4 billion in proceeds from asset sales in the first quarter, and analysts think total proceeds from dispositions eventually could top $7 billion, which the company probably would return to investors via more buybacks, higher dividends, and reduction of debt.

With more-focused operations and a more independent board, Hess likely will be a different and faster-growing company a year from now. That's good news not just for Elliott Management, but all shareholders.

Drilling Down

Hess' jewel is 725,000 acres in North Dakota's Bakken shale. Activist Elliott Management wants the company to spin off the property. Activist investors also have pushed changes at Occidental.